United States v. Maginnis

In 1991 J. Michael Maginnis (defendant), along with his wife and sons, won $23 million in the Oregon state lottery. Maginnis and his wife took $9 million each, and their sons divided the remaining $5 million. Maginnis’s share was to be paid by Oregon via an annuity policy in 20 installments of $450,000. In 1996 Maginnis assigned his rights to receive the remaining 15 payments to Woodbridge Financial Corporation (Woodbridge) in exchange for $3,950,000. On his 1996 federal income-tax return, Maginnis reported the $3,950,000 as ordinary income and paid the tax liability. He also classified the payment as ordinary income for state tax purposes. In 1998 Maginnis filed an amended 1996 return. Maginnis argued that he was owed a refund of approximately $305,000 because he had realized capital gain rather than ordinary income on the payment from Woodbridge. The Internal Revenue Service (the IRS) granted Maginnis the refund. In 2001 the United States government (plaintiff) filed a complaint against Maginnis arguing that the IRS had granted the refund in error. The government asserted that the payment from Woodbridge was ordinary income and claimed that Maginnis was estopped from arguing that the money was a capital gain because he had classified it as ordinary income on his state taxes. The government moved for summary judgment. The district court affirmed the motion, finding that Maginnis experienced no asset appreciation. Maginnis appealed.